Refinancing to Consolidate Debt via Your Mortgage in Canada

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Refinancing to Consolidate Debt: A Complete Guide for Quebec

Consumer debt is a reality for millions of Canadians. Credit card balances at 19-29%, personal loans at 8-12%, and variable-rate lines of credit exert constant pressure on the monthly budget. For homeowners, mortgage refinancing offers a potential exit path by consolidating these debts into a single loan at a significantly lower interest rate. However, this consolidation strategy must be rigorously evaluated to ensure it truly represents a net benefit.

How Consolidation Through Refinancing Works

The mechanism is straightforward: when refinancing your mortgage, you borrow an amount exceeding your current balance. The excess funds are used to fully pay off your consumer debts. The former mortgage balance and consolidated debts are combined into a single mortgage loan, at a rate generally between 4% and 6%. OSFI's Guideline B-20 limits refinancing to 80% of the property's market value. To be eligible, it is necessary to requalify under current criteria, including the OSFI-mandated stress test.

Concrete Advantages of Consolidation

Interest rate reduction: moving from 22% (credit card) to 5% (mortgage) on $30,000 represents savings of approximately $5,100 per year in interest.
Single monthly payment: one withdrawal instead of multiple payments simplifies budget management and reduces the risk of missed payments.
Credit score improvement: full repayment of revolving debts reduces the credit utilization ratio, a significant positive factor for Equifax and TransUnion.
Improved cash flow: the total monthly payment is often lower than the sum of minimum payments across all separate debts.
Acceleration potential: monthly savings can be redirected toward additional prepayments on the mortgage principal to reduce the total duration.

Risks Not to Ignore

The primary risk is the extended amortization. Consumer debts that would have been repaid in 3 to 5 years are now amortized over 20 to 25 years. Even at a much lower rate, total interest costs can be higher. Furthermore, consolidation converts unsecured debts into debt secured by your property. Defaulting on a credit card does not lead to losing your home; defaulting on your mortgage does. Finally, the temptation to reuse freed-up credit lines is the most common and dangerous trap.

Quebec-Specific Costs

Prepayment penalty: The most significant cost. For a fixed rate, the penalty is the greater of 3 months' interest and the IRD. For a variable rate, it is almost always 3 months' interest. Request an official statement from your lender.
Notary fees: The CCQ requires a notary for any mortgage deed in Quebec. Budget $1,000 to $2,000 for preparation and registration of the refinancing deed at the Land Registry.
Property appraisal: The lender generally requires a recent professional appraisal. Typical cost of $300 to $500 in Quebec.
Discharge fees: If switching lenders, the old mortgage must be discharged. Expect $400 to $800 in additional notary fees.

The Key to Success: Post-Consolidation Discipline

For consolidation to be truly advantageous, two behaviours are essential after refinancing. First, reduce the limits on your freed-up credit cards or close unnecessary accounts to eliminate temptation. Second, maintain the same total monthly payment you were making before consolidation. The difference between the old total and the new mortgage payment should be dedicated to prepayments against the mortgage principal. This approach accelerates repayment and significantly reduces total interest costs. Your AMF-certified mortgage broker is obligated, under the LDPSF, to discuss these strategies with you and ensure that consolidation is in your best interest.

Frequently Asked Questions

What types of debts can I consolidate into my mortgage?

You can consolidate most consumer debts: credit cards, personal loans, unsecured lines of credit, car loans, and even tax balances. The lender will generally require payout letters to confirm that the debts will be paid off from the refinancing proceeds.

Will mortgage consolidation improve my credit score?

Over the medium term, yes. Paying off your credit cards and loans in full reduces your credit utilization ratio, a major factor in the score calculation. However, the refinancing credit inquiry may temporarily lower your score by a few points. The key is not to reuse the freed-up credit lines.

How much equity do I need to consolidate my debts?

It is necessary to maintain a maximum loan-to-value ratio of 80% after consolidation, per OSFI rules. This means you need at least 20% equity. For example, if your property is worth $400,000 and your mortgage balance is $250,000, you could potentially consolidate up to $70,000 in debts.

Will I pay more total interest by consolidating over 25 years?

It is possible. For example, $30,000 in credit card debt at 22% repaid over 4 years costs approximately $15,000 in interest. The same $30,000 amortized over 25 years at 5% costs approximately $22,500 in interest. The solution: accelerate payments after consolidation to reduce the effective amortization period.

Can my mortgage broker refuse to consolidate my debts?

Yes. Under the LDPSF and the AMF code of ethics, the broker is obligated to act in your best interest. If they déterminé that consolidation risks worsening your financial situation (debt ratio too high, history of debt re-accumulation), they must direct you toward other solutions such as a financial recovery advisor.

What are the signs that consolidation is not the right solution for me?

Warning signs: your total indebtedness exceeds 40-44% of your gross income, you have previously consolidated debts without changing your habits, you do not have sufficient equity, or your income is unstable. In these cases, a consumer proposal or debt management plan may be more appropriate.